Execution Quality in Open Outcry Futures Markets
Posted: 7 Apr 2005
This study examines the composition of customer order flow and the execution quality for different types of customer orders in six futures pits of the Chicago Mercantile Exchange (CME). We show that off-exchange customers frequently provide liquidity to other traders by submitting limit orders. We examine the determinants of customers' choice between limit and market orders and find that higher bid-ask spreads increase the limit order submission frequency, while increased price volatility makes limit order submission less likely. We also document effective spreads, trading revenues and turnaround times for customer liquidity-demanding and limit orders. Consistent with evidence from equity markets, the results show that limit order traders receive better executions than traders using liquidity-demanding orders but incur adverse selection costs.
Keywords: Execution quality, Bid-ask spreads, Liquidity, Futures, Order submission strategies
JEL Classification: G10
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